Overview
The Central Bank of Nigeria (CBN) is addressing a serious foreign currency exposure challenge. Part of this exposure is concentrated in banks' foreign currency Net Open Positions (NOPs), which threatens the stability of the naira and, on a macro scale, the entire financial system.
In exercise of its powers under the Foreign Exchange Act to regulate the effective operation of the foreign exchange market, the CBN issued a circular on January 31, 2024, titled "Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks." The circular requires banks to limit the NOP of their foreign currency assets and liabilities to 20% of shareholders' funds unimpaired by losses.
This insight examines the rationale for the circular, its implications for banks' foreign currency exposure, and the compliance steps financial institutions should take under the new reporting framework.
